Trading for Dummies, Q&A #50

Transmeta, 30-minute Chart

Questions:

1) Why would you be paying attention to this stock on Thursday, October 16?
2) Is the trend up or down? Would you be looking to get long or short this stock?
3) Where would you get long/short this stock on Thursday, October 16?
4) Where would you put the initial protective stop?
5) When would you stop trading for the day?
6) Where would you exit the position?

Answers:

1) Because it was unusually active, and very volatile.
2) Down. You'd be looking short.
3) Short at 4.24 on a sell stop below the 10:30 inside bar.
4) Initial Protective Stop: 4.40. (max. 3.77%)
5) Right after you enter the position or lunchtime, whichever comes first.
6) End of day. Could cover half, carry half, or just close it all at once.

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Similar to yesterday's trade in CMOS, it was smart to move the initial protective stop quickly to reduce your risk. 3.77% is a bit too wide, but by moving your stop to $4.28 your risk drops to under 1%.

TMTA closed at $4.12 which is only a 2.83% gain on the day, so using the loose $4.40 stop to gauge your reward to risk makes it obvious how necessary it was to move the stop down quickly. With the tighter 4 cent stop the reward to risk moved to 3:1, which is great.

When I see people risking two points to make two points I know they're not going to last long in this game. The key to successful short-term trading is understanding risk and reward, and setting (and adjusting) protective stops in an intelligent way.

One gentleman emailed me recently: "The fact that you use stops at all tells me that you have no balls." I replied: "The fact that you use no stops at all tells me that you have no brains."

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Screen capture of my intraday Watch List:

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